Canaccord cuts rating on Compass Group to 'hold'

Canaccord Genuity on Friday lowered Compass Group to ‘hold’ from ‘buy’ but raised the target price to 1,460p from 1,370p following the catering company’s first quarter trading update.

In the three months to the end of December, organic revenue was up 2.8%, in line with the group’s expectations and Compass said it continues to see strong levels of new business wins and good retention rates. Organic revenue growth was a touch short of analysts’ expectations of 2.9%.

Meanwhile, like-for-like revenues increased modestly, with some pricing offsetting weak volumes in the Offshore & Remote sector.

The company said its outlook for 2017 remains “positive and unchanged” following strong growth in North America and Europe and Rest of World are performing as expected.

“We are nudging up our target price by 6.5% to 1460p to reflect our increased confidence in the outlook but reduce our recommendation to ‘hold’ (from ‘buy’) as the Compass share price is up 22% on a 12 month view and within 10% of our target price,” Canaccord said.

For fiscal year 2017, the broker expects 4.6% organic growth and a 20 basis point increase of earnings before interest and tax margin.

Canaccord believes Powerhouse North America should deliver 80% of the group EBIT growth driven by organic growth of 7% and five basis point rise in margins.

It expects a small decline in EBIT for Rest of the World as growth elsewhere and restructuring benefits “should not be quite enough” to offset the decrease in the Offshore and Remote business in Australia.
Canaccord added that the company’s major currency is in dollars. Currency movements had a positive translation impact on revenues and profit during the first quarter of £924m and £74m respectively. If current spot rates continue for the rest of the year, foreign exchange translation would boost 2016 revenue by £2.3bn and operating profit by £186m.

“Compass generates just 10-12% of EBIT in the UK and a 1% change in a basket of all its currencies has a £12m impact on EBIT,” Canaccord said.

Shares rose 0.21% to 1,442p at 0935 GMT.